Top Tax Deductions DTC Ecommerce Brands Miss (and How to Claim Them)

Cost of Goods Sold: Getting It Right

Cost of Goods Sold (COGS) is the largest deduction for most product-based ecommerce businesses, and it is frequently miscalculated. Under IRC Section 263A (the Uniform Capitalization rules, or UNICAP), certain indirect costs must be capitalized into inventory rather than deducted as period expenses. However, small businesses with average annual gross receipts of $29 million or less (for tax years beginning in 2026, adjusted for inflation under Section 263A(i)) are exempt from UNICAP, which simplifies the calculation significantly.

For DTC brands, COGS should include the direct cost of purchasing or manufacturing products (including raw materials, factory labor, and manufacturing overhead), inbound freight and duties for importing goods, packaging materials that are part of the product (not shipping packaging, which is a separate deduction), and any assembly or customization labor applied before the product is placed in finished goods inventory.

A common mistake is deducting the full cost of inventory purchases in the year they are paid rather than the year they are sold. Under the accrual method, COGS is recognized when inventory is sold, not when it is purchased. Even cash-basis taxpayers with inventory must generally use the accrual method for purchases and sales of merchandise under IRC Section 471, though the Tax Cuts and Jobs Act created exceptions for small businesses under Section 471(c) that allow certain taxpayers with $29 million or less in gross receipts to treat inventory as non-incidental supplies.

Shipping and Fulfillment Costs

Shipping and fulfillment costs are fully deductible as ordinary and necessary business expenses under IRC Section 162. This includes outbound shipping to customers (whether you offer free shipping or charge for it), return shipping costs (including prepaid return labels), packaging materials used for shipping (boxes, tape, bubble wrap, branded mailers), and third-party fulfillment fees charged by providers like ShipBob, Deliverr, or Amazon FBA.

The deduction for shipping costs is straightforward, but the classification matters for financial reporting and tax planning. Outbound shipping is typically categorized as a selling expense, while inbound shipping on inventory may need to be capitalized into COGS under UNICAP rules (if applicable).

Amazon FBA fees deserve special attention. Amazon charges several types of fees, including fulfillment fees, storage fees, long-term storage fees, and referral fees. All of these are deductible, but they should be categorized correctly. Fulfillment fees are shipping and handling expenses. Storage fees are warehousing expenses. Referral fees are selling commissions. Proper categorization helps with financial analysis and supports deduction positions during an audit.

For brands that handle fulfillment in-house, the deductible costs include warehouse rent, utilities, packaging supplies, equipment (potentially depreciable under Section 179 or bonus depreciation), and wages for warehouse employees. If you run fulfillment from your home, the home office deduction (discussed below) can capture a portion of these costs.

Software and Technology Subscriptions

Modern ecommerce businesses run on a stack of software tools, and all subscription costs are deductible as ordinary business expenses under IRC Section 162. Common deductible subscriptions include your ecommerce platform (Shopify, BigCommerce, WooCommerce hosting), email marketing tools (Klaviyo, Mailchimp), analytics and tracking (Google Analytics is free, but paid tools like Triple Whale, Northbeam, or Supermetrics are deductible), customer support platforms (Zendesk, Gorgias), inventory management (Cin7, Skubana, TradeGecko), accounting software (QuickBooks, Xero), sales tax automation (TaxJar, Avalara), and design tools (Figma, Canva Pro, Adobe Creative Cloud).

Digital advertising spend is also fully deductible. This includes Facebook/Meta ads, Google Ads, TikTok Ads, influencer payments, and affiliate commissions. These expenses are deducted in the year they are incurred, regardless of when the resulting sales occur.

One often-overlooked deduction is the cost of website development and design. Under Rev. Proc. 2000-50 and subsequent guidance, website development costs are generally treated as software development costs. For costs incurred after 2021, IRC Section 174 (as amended by the TCJA) requires capitalization and amortization of research and experimental expenditures over 5 years (15 years for foreign research). This is a significant change from the prior rule that allowed immediate deduction. Website development costs for a new site or major redesign now fall under this amortization requirement.

Home Office, Vehicle, and Travel Deductions

Many ecommerce founders operate from home, at least in the early stages. The home office deduction under IRC Section 280A allows you to deduct a portion of your rent or mortgage interest, utilities, insurance, and maintenance based on the percentage of your home used exclusively and regularly for business.

The simplified method allows a deduction of $5 per square foot, up to 300 square feet, for a maximum deduction of $1,500. The actual expense method requires calculating the exact percentage of your home used for business and applying it to actual expenses. The actual method often produces a larger deduction but requires detailed record-keeping.

If you use a portion of your home as a warehouse for inventory storage, that space qualifies for the home office deduction even if it is not your principal place of business, provided the space is used regularly for storage and your home is the only fixed location of the business. This is a specific exception under Section 280A(c)(2).

Vehicle expenses for business-related trips, such as driving to the post office, meeting suppliers, or visiting your 3PL warehouse, are deductible under the standard mileage rate (67 cents per mile for 2026) or actual vehicle expenses. Keep a mileage log with dates, destinations, business purpose, and miles driven.

Travel to trade shows, supplier meetings, and ecommerce conferences is deductible, including airfare, hotel, meals (50% deductible for business meals under Section 274(n)), and conference registration fees.

Product Samples, Photography, and Content Creation

DTC brands invest heavily in content creation, and most of these costs are deductible. Product photography costs, including photographer fees, studio rental, props, and lighting equipment, are deductible as advertising expenses under Section 162. Product samples given to influencers or sent to media for review are deductible at cost as promotional expenses.

Inventory used for photoshoots should be removed from COGS and reclassified as an advertising expense if the products cannot be sold after the shoot. This ensures you get the deduction in the year the cost is incurred rather than when (or if) the product is eventually sold.

Content creation expenses, including freelance copywriters, video production, graphic design, and UGC (user-generated content) contracts, are all deductible as advertising expenses. If you hire a freelancer and pay them $600 or more in a calendar year, you must issue a Form 1099-NEC by January 31 of the following year.

One deduction that ecommerce brands frequently miss is the cost of product returns that cannot be resold. If a returned item is damaged, opened, or otherwise unsellable, the cost of that inventory can be written off as a loss under Section 165. Maintain records of returned inventory that is disposed of, including the date, quantity, original cost, and reason for disposal.

At SpryTax, we work with DTC ecommerce brands to identify and properly document all available deductions. Our clients in this space typically save $5,000 to $25,000 in additional deductions annually through proper categorization and documentation of expenses that were previously either missed or improperly classified.